Now that you’ve purchased your property and continued to add properties as a business, you need to manage operations profitably.
Keep your business records in a format according to the IRS Schedule E. You’ll want to be mindful of all the tax write-offs and considerations.
An excerpt from Book Five in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Sierra Mountain resorts.
Part Five in a 5-Part Series: Is An Investment in Real Estate Right for You?
Part One: FOMO
Part Two: Real Estate Investment Types
Part Three: Building Your Rental Business
Part Four: Find Experts for Sophisticated Financial Strategies
On a day-to-day basis in the beginning you’ll have to deal with all the headaches associated with rundown properties.
You’ll want to develop a trusted relationship with the contractors who will be upgrading units within the budget you set.
Like the stars of HDTV, you’ll need to trust you instincts when you first assess the future value of the property, despite the current poor appearances.
You’ll want to select and develop a trusted relationship with a real estate attorney as well.
What if you had overlooked rent control laws, for instance?
Obviously, those laws would have a severe impact the profitability of your rental property.
- Can you raise rents on vacated properties?
- Can you raise rents on the renovated apartments as they are finished?
- Is there a right to new considerations when you want to raise rents?
- Should you enter into limited partnerships to develop affordable rental housing while qualifying for tax credits?
How do you pick an attorney who will work closely with you when you need him or her?
You may need to interview several before settling on the best fit for you.
Briefly you’ll want to compare their answers to the following questions.
- Do you do any real estate deals?
- Are you a specialist in any type
- Residential
- Commercial
- Industrial
- Raw Land
- How many real estate closings did you do last year?
- What are your normal fees for a person like myself who wants to buy income real estate?
- Do you have any contacts in real estate who can help me build my holdings?
- Will you protect me from making silly mistakes when I come across a lucrative property?
Now that you’ve purchased your property and continued to add properties as a business, you need to manage operations profitably.
First of all you’ll need to optimize rental prices and manage your vacancy rate.
- Often local papers carry ads for free until a rental occurs.
- Don’t overlook religious congregations to get the word out.
- Government agencies frequently look for rental units — local offices of federal departments (HUD) and state agencies typically with “Housing” in their name.
Of course, don’t overlook local rental agents to determine price and rental relationships at a reasonable cost.
And, on an ongoing basis you need to manage your expenses.
For example:
- Use automatic controls for fuel and electric services
- Contact local tax collector to aggressively reduce real estate taxes
- Get bids for trash disposal
- Use police and fire department personnel for maintenance at 33% rates (in their off hours)
Operating your rental investment as a business, you’ll want to brainstorm ideas to generate more cash.
Consider these to get you started.
- Charge the maximum rent for each unit: index to inflation
- Keep upgrading your class of tenants
- Market your property every day
- Earn interest
- Find licensed part-timers
Hack away at fixed expenses
- Refinance to lower monthly payments at a rate 2% lower than current
- Transfer rent security deposits to a lender if it well help secure a loan
- Refinance when you build 25% to 50% cash out
- Set up automatic rent collection, have tenants pay utilities, find low maintenance and labor properties.
One last tip from the pros.
Keep your business records in a format according to the IRS Schedule E.
You’ll want to be mindful of all the tax write-offs and considerations.
What to do (and not to do) will impact the profitability of your business.
Consult a tax expert.
For how to account for issues like active participation, joint ownership, personal and rental use for vacation homes and more.
Don’t solely rely on this discussion.
Income in the form of rents and royalties
1. Sources
a. Rents
b. Laundry machines
c. Telephone(s)
d. Other services (cleaning apts.)
e. Interest on rent security deposits
2. Forms
a. 1099
b. K-1 Worksheets
Expenses
1. Advertising
2. Auto
a. Travel
3. Cleaning and maintenance
4. Commissions
5. Insurance
a. Fire, liability, structural
6. Legal and other professional fees
7. Management fees
a. Maintenance, cleaning, supervision
8. Mortgage interest qualified
a. Mortgage interest other
9. Other interest
10. Repairs
11. Supplies
12. Real Estate taxes
a. Other taxes
13. Utilities
a. Trash removal
b. Water
c. Electric
14. Other expenses
a.
b.
c.
d.
e. Indirect operating expense
f. Operating expense carryover
g. Vehicle rental
h. Amortization
15. Depreciation
a. Depletion
b. Depreciation carryover
16. Total expenses
17. Income or (loss)
18. Deductible rental real estate loss
Steps:
(22) Selectively evaluate the best quality-of-life communities to live in and weigh the tradeoffs of risk and rewards for accruing real estate appreciation along a progression of rural and small towns that meet what your pocket books can afford.
(34) On your visits look for any newer developments that may trigger changes in neighborhood patterns. New construction in or around the neighborhood? Major regional economic adjustments? Transition from households with children to ones that are empty nests? Rezoning, and dramatically rising/falling land values?